Nike as stock pick has winner's edge

Sunday

Jul 9, 2017 at 5:35 PM

Wall Street reminds me a little of the weather here in Florida, it’s either dry as a bone or you are engulfed in water. Although I can probably predict daily activity on Wall Street with the same degree of accuracy as I can the weather, I believe the markets will continue their upward momentum in the months ahead. However, as in any rose garden, there will always be the occasional thorns.

Now, before you sigh in resignation, consider that when the shares of quality companies go on sale; don’t cry, go shopping. It does not matter whether you already own the stock or not. Quality is quality and a sale price is always temporary.

Investment success comes from investing in stocks of specific companies whose returns your research indicates will outperform the general market and still meet your risk requirements.

Notice I did not say anything about investing in companies that some parasitic investment letter, TV performer or commission based stock broker says you must buy right now. Believe me if they really knew what stocks to buy and when, they would be buying and not living off subscriptions, advertisers and commissions.

There is nothing wrong with reading about or listening to investment ideas. It is when you act on those ideas without doing your own due diligence that losses occur. Act imprudently and the market will take its toll.

So where do you go from here? Let me start by saying that I am the antithesis of your normal sports enthusiast. However, that is not a hindrance to recognizing successful companies in the athletic arena. Nike (NKE) with its famous swoosh trademark, would be my first suggestion in the competitive world of sports apparel ... and the shares are on sale.

When I wrote about the company a year ago, my earnings estimate for fiscal 2017 (fiscal year ended May 31) was $2.40 per share with a 12-month projected share price of $61, for a 10 percent capital gain. There was also an indicated dividend yield of 1.15 percent.

So how did the company do? Earnings for the year came in at $2.51 and the shares recently closed at $57.57, slightly below my forecast.

Nike produced strong fiscal fourth-quarter earnings. For the quarter, revenues were higher, profits were up 5 percent, and the company’s gross margin increased. Inventory levels also came down 6 percent over the past 12 months.

Nike’s launch of the Air VaporMax shoe cushioning platform saw solid demand and pointed the way forward for the company's pipeline of new releases.

The company’s direct-to-consumer business climbed 18 percent during the year thanks to a 30 percent increase in e-commerce sales. The longterm prospects for this channel appear to be excellent. Although the division represents only about one-third of Nike’s overall revenue, it was responsible for over two-thirds of the company's growth in fiscal 2017.

And aiding the direct-to-consumer business, of course, was Nike’s capitulation to Amazon. After years of holding out, Nike finally gave in.

Nike recently announced it would begin selling its wares directly with the world's largest online retailer after a decade of rebuffing Amazon's invitations. At the same time, Nike made it clear it would begin selling only a limited product assortment on Amazon as part of a pilot program.

Currently there are thousands of Nike products available on Amazon but those sales are going to third-party resellers rather than Nike itself.

For fiscal 2018, Nike is projecting mid- to high-single-digit growth, on pace with the past year's 8 percent improvement. Gross margin is forecast to rise substantially due to moves toward higher-value direct sales. The increase in adjusted earnings is expected to push double digits during fiscal 2018.

The intrinsic value of the company using a free cash flow to the firm is $89 per share. My earnings estimate for the coming fiscal year is $2.58 per share with a 12-month projected share price of $63, for about a 10 percent capital gain. There is also an indicated dividend yield of 1.22 percent. Nike has been raising dividends for 15 years.

Lauren Rudd is a financial writer and columnist. You can write to him at Lauren.Rudd@RuddInternational.com. Phone calls accepted between 10 a.m. and 3 p.m. EST at (941) 706-3449. For back columns please go to www.RuddReport.com.